Latin AmericaGini back in the bottle

economist.com/special-report/2012/10/13/gini-back-in-the-bottle

Special report
An unequal continent is becoming less so

Oct 13th 2012

MICHAEL JACKSON BROUGHT Santa Marta a moment of fame. In February 1996 the
King of Pop landed by helicopter at the top of one of Rio de Janeiro’s most notorious
favelas. Politicians tried to stop him, but Mr Jackson had permission from the drug barons
who ruled the slum. He danced down the steep paths between shacks clinging precariously
to the mountainside, surrounded by a cheering crowd of Rio’s poorest citizens, and belted
out his hit single “They don’t care about us”. The music video was played around the world.
It trained a spotlight on Rio’s poverty and inequality.

Sixteen years later Santa Marta is once again a showcase, but of a better sort. It was the
first favela to be “pacified” under a government plan to wrest control of Rio’s slums from the
drug lords. The place was stormed by the army in 2008. It now has a police station, and is
peaceful. It is a thriving example of the boom at the bottom of Brazilian society.

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Meet Salete Martins, a bubbly 42-year-old, whose family moved to Santa Marta from
Brazil’s north-east when she was eight. By day she works as a trainee tour guide, showing
visitors around her neighbourhood for a city-financed non-profit group called Rio Top
Tours. At night she studies tourism at a local college. At weekends she sells Bahian food
from a bustling stall near the favela’s entrance. And in between she flogs a popular line of
beauty products. Her monthly income is around 2,000 reais ($985), four times as much as
she made selling sandwiches three years ago and more than three times the minimum
wage. She plans to launch her own tour-guide company before the end of this year.

Ms Martins’s success is striking, even in

Santa Marta. But it mirrors a trend that has
swept the whole of Latin America. Poor
people’s incomes have surged over the past
decade, leading to a big drop in inequality.
In most Latin American countries the Gini
coefficient in 2010 was lower than in 2000.
The region’s average, at 0.5, is down from
almost 0.54 a decade ago, and lower than at
any time in the past 30 years (see chart 3),
though still high relative to other regions.
Judging by evidence from Argentina, the
only country in Latin America to publish
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statistics on tax returns of top earners, the richest 1% are still pulling ahead of the rest. But
that concentration is more than made up for by the narrowing of gaps further down the
income scale.

Both shifts are reflected in popular culture. “Mulheres ricas” (“Rich women”) is a new
reality-TV show about Brazil’s ultra-wealthy (“I bathe in mineral water every day,” said one
woman in an early episode). But the country’s most popular prime-time soap is “Avenida
Brasil”, which documents life among the newly minted middle classes. Although Latin
America saw only half the average GDP growth of emerging Asia over the past ten years,
its poverty rate fell by 30%. Around a third of the decline is due to improvements in income
distribution.

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How did a continent that had been egregiously unequal since the conquistadores’ land grab
suddenly change course? Not because of radical nationalisation and redistribution. Latin
America has a few asset-seizing hard-left governments, notably Argentina and Venezuela,
but inequality has also fallen in countries following a more orthodox economic course, such
as Chile and Colombia. Nor is the turnaround just a side-effect of the commodities boom.
Inequality has fallen in countries that rely heavily on exports of commodities, such as Peru,
but also in those where manufacturing plays a bigger role, such as Mexico. Nor can
demography be the main cause. Poorer Latin American families have become smaller,
which reduces inequality, but these changes were well under way in the 1980s and 1990s.

According to Nora Lustig, an economist at the University of Tulane and one of the first to
document the narrowing of the region’s income gaps, two things have made a big
difference. First, the premium for skilled workers has been falling: a surge in secondary
education has increased the supply of literate, reasonably well-schooled workers, and
years of steady growth have raised relative demand for the less skilled in the formal
workforce, whether as construction workers or cleaners. Second, governments around
Latin America have reinforced the narrowing of wage gaps with social spending targeted at
people with the lowest incomes. These include more generous pensions and conditional
cash transfers—schemes that offer payment to the poorest families in return for meeting
specific conditions, such as making sure their children go to school.

The most striking change has been in education. In the past Latin American governments
lavished cash on universities. State primary and secondary schools were underfunded and
of appalling quality. That bias in favour of tertiary education, perversely, most benefited the
children of the rich, who had attended private primary and secondary schools. But since the
early 1990s education spending has become much more progressive, with a huge
expansion in public secondary education among the poor. According to Karla Breceda,
Jamele Rigolini and Jaime Saavedra, three economists at the World Bank, Latin American
governments, on average, now spend a larger share of GDP on education for the poorest
20% of children than does the United States.

More progressive spending has produced results. Some countries have seen an increase
of 20 percentage points in the share of children finishing secondary school. Another study
for the World Institute for Development Economics Research in Helsinki by Guillermo
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Cruces, Carolina García Domench and Leonardo Gasparini showed that the gap between
rich and poor in secondary-school enrolment has fallen in all countries except El Salvador,
Honduras, Guatemala and Nicaragua.

Many Latin countries are also championing pre-school education. Rio’s city government, for
instance, has dramatically increased its network of nursery schools since 2009, building 74
new ones in the past three years. Any child from a family below the poverty line is
guaranteed a free place in a nursery from the age of six months.

A nudge in the right direction

Conditional cash transfers (CCTs) reinforce this focus on schooling. These stipends cost
relatively little (typically 0.2-0.8% of GDP) but influence the priorities of many. About a
quarter of Brazil’s population now gets some money from Bolsa Família, the country’s CCT
scheme. State and local governments piggyback on top. In Rio, for instance, the city
supplements Bolsa Família payments for 700,000 of its poorer families. If children do
exceptionally well in exams, a bonus is paid. If they miss school, the payment stops. Ms
Martins realised her 14-year-old was skipping school only when her monthly stipend was
docked. Several academic studies in Mexico show that kids in CCT schemes stay at school
longer.

Better education is boosting social mobility. Historically, the link between parents’ and
children’s education has been closer in Latin America than anywhere else. In Peru, for
instance, almost 70% of a child’s educational achievement can be predicted from its
father’s schooling. But a forthcoming report from the World Bank suggests that the current
generation of Latin American children are both better educated than their parents and
moving relatively faster up the education ladder. And, like India’s poorest castes,
disadvantaged indigenous people have made big gains.

These newly educated workers enjoy far better prospects in the formal workforce than their
parents did. State pensions have become more generous. Countries from Argentina to
Bolivia have introduced non-contributory pension schemes—in effect, a promise of
government support for the elderly. Minimum wages across the continent have soared.
Brazil’s has risen by more than 50% in real terms since 2003. And since pension benefits
are linked to the minimum wage, the two trends reinforce each other.

The precise contribution of better education, better opportunities for less skilled workers
and bigger social spending differs by country. An analysis by Ms Lustig, Luis López-Calva
of the World Bank and Eduardo Ortiz-Juarez of the United Nations Development
Programme suggests that narrower wage gaps explain most of the reduction in inequality
throughout the region. According to calculations by Marcelo Neri, of the Institute for Applied
Economic Research, government transfers explain about one-third of the drop in inequality
in Brazil.

So far, so good. But will these gains last? In education, the big challenge is to complement
quantity with quality. Latin America has now reaped the benefits that come from simply
getting more children into school for longer. But most of the state schools are still much
less good than their private equivalents. Virtually all middle- and upper-class children still go

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to private primary and secondary schools. Until those gaps in quality have been eliminated,
educational inequities will persist. They are behind the recent wave of protests over
education in Chile.

The more immediate challenge is how to pay for all this. Latin American states have
traditionally not been progressive in outlook. Put crudely, governments raised revenue from
the more affluent, then spent it on generous public pensions for those same people. Even
now, 60% of transfer spending in Bolivia, for example, goes to people who are not poor. Mr
Saavedra calls it a “fragmentary social contract”. Governments fail to provide good public
services, and middle-class people rely on private education and health care. But they do
get generous pensions in return for their taxes.

The long boom of the 2000s allowed a painless change to this social contract. Sustained
growth brought in enough tax revenue to boost both education spending and transfers at
the bottom without pushing up tax rates. The boom also allowed huge increases in
minimum wages without apparent damage to employment. But as growth slows and the
real value of minimum wages rises, that combination is becoming unviable.

If the improvements in inequality are to be maintained, let alone continued, tough choices
will have to be made. Middle-class entitlements will need to be squeezed. Much like the
United States, many Latin countries will have to decide whether to invest in poorer kids or
continue to pay generous pensions to richer old people. In both places the social contract
needs to be remade. For evidence that this is possible, turn to Sweden.

Special report: For richer, for poorerMore in this special report:

→ Sweden: The new model

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